Morning Thoughts – Oldinvestor

May 22, 2020

More bearish news for LNG is out. I heard this as a rumor on Wednesday. Now we know for sure; 45 cancellations.

https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/052120-us-lng-cargo-cancellations-mount-for-july-as-weakened-global-demand-persists

The link above from Platts, mentions 45 cancellations for July. If I’m remembering correctly, there were 30 cancellations in June.

This takes me back to ronhenergy.com to look at LNG loads per month.

LNG exports in US Loads/Month and Bcf/Month at RonHenergy.com

30 loads is nearly half of all LNG exports by load, and 45 loads will be 60% to 70% based on recent activity leading up to the wuflu. I expect there to be another drop in LNG feed gas to LNG export facilities. Possibly as low as Jan 2018, or 2-3Bcf/d…. ouch.

US LNG feed gas to all LNG export facilities at RonHenergy.com

And the saga continues. I had mentioned Oil being the main factor in the drop Wednesday for natgas. This is far bigger though not any more surprising. To remove another 3Bcf/d of gas from US demand is another nail in the coffin for another producer. Obviously I have an uphill battle buying UNG here.

NGN20 daily chart using Schwab/Street Smart Central

July has strong support around 1.825. If you were all out, this would be the place to test a long position. Granted that LNG news is very bearish for near term storage, this could be a point at which July prices break down. One thing for me is still certain, this market is range bound at best until something changes to ensure storage will start subtracting it’s over supply vs the 5 year average.

My position

UNG – now 50% in with an average of $12.03 – I chose to purchase with 10% more funds last night because I feel the bottom is in or near and I have not been utilizing my funds. This does require me to use even more if prices fall harder. I’ll have to be more patient if the price moves lower from here. I will not be buying today unless UNG falls closer to $10, which probably will not occur on a friday, even with the bad news in LNG. Market makers already got that news 2 days ago anyway. I’ll be happy to reduce 10% at $12.03, but I don’t believe that will happen today either. I’ll go ahead and place the order to reduce, but with no expectation of it filling today. I’d like to stay an think about what else I have to ramble on about, but I must work. Day jobs are good… Good luck

Oldinvestor

The Heller Angle – May 21st, 2020

NGN20 is back towards the previous lows of 1.802 on March 16th and the recent low of 1.822 of just last week. As I write, NGN20 is trading at 1.841. I’ve written mostly about supply so far and since my first post supply has fallen further to 87.0Bcf. With the decline in production and the price for the 1.35 x 1.20 put spread again at 0.011, I feel comfortable adding to this position and selling another credit spread.

The last thing I want to do is advocate adding to positions just because the price moved against my previous trades. By trading small and knowing the max risk with an option spread trade, we can think clearly and logically and say has my view changed, do I like the position better? This way we can add to a position from strength and not from weakness. Markets will move against you and a trader needs to maintain discipline by knowing the max risk beforehand so that he/she can trade with a clear mind.

If supply had increased, or if the storage report today at 81Bcf came in higher, by no means would I add to this trade. Frankly, I’d look to sell a call spread to help move more towards a delta neutral strategy. Since I am still bullish, I am content to wait on the call side. Hopefully the market gives us another opportunity in the future, but if not than so be it. I will take the opportunities that the market gives me.

Jeremy made some good points on why the demand side is probably causing the weakness in price. With oil prices rallying back above $30 WTI, more associated gas production that was shut in due to oil will come back into the NG supply. I’m not sure when but there are good arguments that the supply will be back closer to July vs June. The arguments I’ve seen discuss how physical commodities are nominated for transport on pipelines. Being a financial player only with no physical commodity experience, I cannot opine on the truth of this statement and will monitor.

The other bearish discussion coming out of the market are more LNG cargo cancellations. This discussion has been out in the market for a while, but the demand side seems to be getting worse. As recently as a month ago, the consensus seemed to me that LNG exports would bottom at 6 Bcf. There is now discussion that exports could potentially drop under 5Bcf and possibly as low as 4Bcf. I saw a twitter post saying the Europe gas was down big again today, but have not been able to verify yet with additional posts.

Trade 3 – Sell 1.35 x 1.20 July puts for 0.011 credit (filled).

I seek out all feedback especially push back if you are bearish on NG. I’d love nothing more than to change my view if I am wrong. Please send me a tweet publicly or privately @jrhngc

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Morning Thoughts – Oldinvestor

May 21, 2020

The big drop yesterday? What the hell happened. Josh had mentioned the weakness in the last three days. I noticed this as well, it was hard not to. UNG had pretty much gone to $12.5 and stopped each day. Yesterday was different; the 10:30 candle on 5 min chart is larger, it stands out. This was during one a very prominent surprise oil draw during the EIA oil report that normally is published at 10:30 est. on Wednesdays.

So my main focus here is that oil got a surprise bullish report, this is well received by oil of course, not so much for natgas. This is going to sound more obvious to most readers, but for now I want to sound obvious to most. When the pandemic was starting to have a major effect on demand, it was perceived that oil production was going to crash down all around us and the associated gas would be drug down with it. This did happen, but to what degree?

Daily production posted from HFIR

Natgas production was already on the decline due to horrible pricing for producers. I would say this is responsible for lowering production to 91-92Bcf/d; normal decline. Another 1.4Bcf/d, we just learned, is due to a dry gas producer (EQT) in the northeastern US. This brings the total production down to 90.6Bcf/d. Now keep in mind, everyone is still not totally clear on what the correct production numbers are, my self included (obviously). If production is as low as 88Bcf/d right now; it is possible the drop in associated gas is responsible for a reduction in natgas production by 2.6Bcf/d. That’s drastic…

Circle back around to now. If oil had one of the most bullish surprising days, at least in a long while, especially on the back of such bearishness and during a high volatility time with high running emotions…. And… we just rode a wave in natgas due to associated gas falling. It is possible that when oil reverses it’s mentality back to prices are climbing, the us oil market has quickly swung back to being under supplied; this is bearish for natgas. Now I think natgas seems to be, often, pulled around by the horns by big players. Not in a market manipulation kind of way, but just in a big influential kind of way. I don’t really know how to compound on that right now. plus I now have a call, I want to buy some UNG this morning, but I must answer this call first.

Back again. to recap, Natgas hit a ceiling Monday, Tuesday, and Wednesday. So maybe that is all natgas has in it for now to the up side. I still lean more to the bull side because of pricing and what it is slowly doing to the market. Oil did drag down associated gas, but we aren’t sure this caused a 2.6Bcf/d drop in natgas production. That number could be way over rated, there have been revisions since that chart above was posted. The drop in production was not as drastic. So the drop due to associated gas could be closer to 1 – 1.5Bcf/d. Also oil isn’t going to just jump back online. Let’s not forget, pricing for oil and natgas are both much to low to allow production a fast recovery. There are still bankruptcies to process and capex to cut even now.

I need to speed this along

My position

UNG – now back to 40% in with a new average $12.16

I’m interested in adding another 10% to UNG closer to $11 if we can get there today or tomorrow. July is again 15c below $2. It feels as though we are swirling the drain again. That, to me is a fair indication to buy. I’m betting there will be more dry gas production slowing/cutting soon enough to give natgas pricing another shot. Until I hear solid news of more LNG cancellations, I feel I’m being cautious enough of that for now. Report comes at 10:30 est time for natgas. http://ir.eia.gov/ngs/ngs.html the link well auto refresh at 10:30.

I will add during/just after the report is released on a sizable drop anywhere near $11 in UNG. I will also reduce if somehow UNG jumps to my average of $12.16. 10% to buy or 10% to reduce. Good Luck

Oldinvestor

The Heller Angle – May 20, 2020

NGN20 July did another test of the level reaching a high of 2.028 but not quite getting to the 2.04 – 2.10 I was looking for. I see that area as congestion with the first test in mid March, testing again the first week of April before breaking through later. Looking at the chart again, I’m surprised I didn’t notice it before, there is a big candle reversal on April 27th where the low is 2.025. Instead of 2.04, which was the 200 day SMA, I am now going to use 2.025 as to where I’m trying to sell a call spread. Also the 200 day SMA has now moved down to 2.027 since then.

Honestly, I feel dumb that I missed this before but I would argue that if the market doesn’t make you feel dumb a few times each week, you might be doing something wrong. Obviously we’ve seen 3 tests of that level and today seems like a solid rejection.

So I’ve moved the limit price of my call spread (2.50×2.65) down slightly in hopes I catch it if we get another rally and test this Thursday or Friday.

Fundamentally, I think we should be rallying so I’m not sure why the reversal today. Weather overnight was slightly bearish but almost a nothing burger in my mind. Supply continues to come down, the latest report I’m seeing now is 87.0Bcf. The NG producers are on our side in that low prices delays completions to later this year, choking back where they can, delaying repairs and workovers if it doesn’t damage the well.

We received confirmation of this view with EQT shutting in 1.4Bcf per day confirmed by an SEC filing with ETRN.

https://seekingalpha.com/news/3575651-equitrans-top-producer-customer-to-slash-natural-gas-output

Because I am still bullish and think this decline back below 1.90 is unjustified (1.885 low today so far, currently 1.911) I’m looking at selling another put spread. Same setup as before, 1.90 straddle is going for approximately 0.35 I want to sell at ~1.5x away (or 0.525) so I’m looking to sell the 1.40×1.25 for a credit of 0.011. After sitting between the bid of 0.010 and ask 0.012 for over 10 minutes, I moved my order to 0.010 for an instant fill.

In my first trade that I posted on our NGetf.com website, I accidentally only used 1 commission as I normally don’t do these calculations every time (oops sorry). This trade calculation is correct (thank you for the reader who pointed this out) $94 / $1406 is a return of 6.7%. Expiration is 36 days to go.

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Morning Thoughts – Oldinvestor

May 20, 2020

What do you know, I sit down to start typing and get called away… I should return.

Come to think of it, I don’t have much alteration to my thoughts since yesterday. Production still appears to be falling. I’ve seen a lot of discussion about who’s right about where production really is right now. As in, what is actually being produced. I don’t know of a single entity that is capable of collecting and processing data from every well in the US each day. They all take samples, possibly from as many sources as they can reach out to, then reverse engineer a number they suspect to be the total production for the US. Granted, when there is a major change in production, number from one data source to the next will be skewed. Then EIA gets their data from Pointlogic, part of OPIS, which is now IHS Markit or owned by…? Don’t listen to me.

The overall background has not changed, there was a large drop in production, assumed to have happened over last weekend. This drop will still effect the entire market in a bullish manor, but will have limited effect.

  • Production drop = bullish
  • Some wells are hard to restart, some are not – keep this in mind = limits bullishness
  • storage fullerer than normal = bearish

All roads lead to storage. In 2019, storage swing from under supplied to over supplied vs 5 year average. Low pricing was beginning to solve the problem and the pandemic has simple accelerated the issue. I want to jump ahead and say that storage will swing from over supplied to under supplied. I’m on the long side of natgas, so it should be that exciting. But…. Keep this continual warning in your back pocket, shale is quick to produce, everyone has seen it happen, a few times now.

My position

UNG – 30% in with an average of $12.36 – limit order to sell down to 10% holdings at $12.95

I remain with my limit to sell at $12.95. The market is trying again this morning. I feel 30% in a good position since I’ll make a small profit on a move higher, which is all I ever expect. 30% is ideal to me if prices fall again, I have plenty of funds to increase and improve my average. I have not plans to buy yet. Good luck

Oldinvestor

The Heller Angle – May 19, 2020

We didn’t quite make it to 2.04 line this morning in July NGN20, so I continue to monitor.

On the EIA DPR report, there wasn’t any huge insights by me why the declines are modeled lower with less drilling. I think that a change in total production is the main cause as can be seen in the screenshots below. April DPR report models show May production at 83.16Bcf; May report models show May production at 82.25Bcf.

April 2020 Drilling Productivity Report for April by EIA.gov
May 2020 Drilling Productivity Report by EIA.gov

Remember that this is from 7 regions so total production is higher. I still think my argument of 1Bcf declines per month going forward is valid but even if we are more conservative at 0.5Bcf, supply is going to become a serious problem later in the year. Prices will need to go higher to reduce demand as supply keeps falling. The market is pricing this in on the strip and with oversupply from a warm winter this seems enough to balance the market for now. The market is relatively smart and knows this information, but what we don’t know is if the price increase is enough. I’m of the opinion no, because the strip and prices in 2021 and especially 2022 need to move higher. We will talk about the implications of this and the way to play it (NG producers vs futures / future options in future posts).

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Morning Update – May 19, 2020

To extend thoughts on the big down revision in production this weekend, causing prices to gap up Sunday… Josh Heller shared with me that Equitrans Midstream reported it was notified of reduction of natgas (https://seekingalpha.com/news/3575651-equitrans-top-producer-customer-to-slash-natural-gas-output).

The article I shared is only a quick update, it’s not a full article. It does mention EQM pipeline and speaks of Pennsylvania and Ohio. This area would be part of the Mid Atlantic region as viewed by the EIA. I’m not well versed in regional pricing or their effects on NYMEX pricing of natgas, but one thing stands out; 3 of the main Northeastern regional prices listed on the EIA website look pretty rough. These prices I’m showing below, I believe are for yesterday trading, or possibly the weekend. Either way, it is recent pricing for the entire region and it looks convincing to confirm why a producer would want to shut in wells. Dry gas wells, in a region of strong production and large, high producing wells.

EIA daily spot pricing
Wholesale Electricity and Natgas by region at EIA.gov

This tells me producers are starting to weigh the cost of producing at these prices vs waiting out by cutting back production. I also believe other producers will follow this lead, and soon if pricing doesn’t reverse. This is not a matter of forced shut-ins as has been the case with oil. This is purely a decision by a company to reduce output in an attempt to force a shift in the S/D balance, allowing prices to trend higher.

This has a limited bullish effect on the market still, since these wells can quickly be brought back online and go right back to producing natgas. So while this is exciting, and it is a real cut back in production, it will be limited. When pricing returns to a high enough level, production can ramp up quickly, keeping a ceiling on the price of regional and NYMEX NG pricing.

My position

UNG – 30% in with an average of $12.36 – placing an order to reduce again at $12.95

I remain optimistic that pricing will creep up ever so slightly more and I will exit soon this go around. I believe I would like to reduce again at $13ish for UNG. This may be reaching, but any more news of producers cutting back in the Appalachia area, will be all that is needed. $2 Natgas is too cheap for producers; Dry gas has already begun to budge. May we see more cuts to come. I’ll go ahead with an order to sell down to 10% UNG holding at $12.95 now. Let’s see what happens. Good luck

Oldinvestor

The Heller Angle – May 18, 2020

Please forgive me for I am posting this from my phone with no edits, still the same great information.

NG rocketing higher today on a decent sized drop on production. The source I follow BlueGold Resources (no affiliation I’m just a subscriber of their service) is reporting a decline in supply of approximately 1.4Bcf. From what I’ve seen / heard, Point Logic (which also reports EIA data) reported a bigger drop, but that was in part due to them reporting a higher initial production on Friday. While the drop in supply is real, I think it is less and Point Logic (while very good) is lagging a little bit here. There are also rumors of supply shut-ins which make a lot of sense to me as well. Either way, supply is dropping. As I mentioned in my last post, EIA DPR is showing a decline of 0.89Bcf per day decline over the month of April. May is now out (https://www.eia.gov/petroleum/drilling/#tabs-summary-2) and I’m quite surprised that the report is only showing 0.78Bcf for May. I’m digging deeper now to see if I can understand why. I really thought the report would show >1Bcf.

As far as trading, I was also monitoring the 2.35×2.50 call spread for NGN20 (July) to sell as prices approached 2.04-2.10 with the current price of 1.966. The credit spread received was 0.014-0.015, with the increase in NGN20 that credit spread is now trading at 0.020-0.022. This is why I stay patient and wait for the market to come to me. I won’t always be right of course and sometimes waiting will be the wrong move. If you miss a trade, that’s ok the NG market gives a lot of opportunities. As I’m ‘preaching’ now, no trade for me, I’m hoping to get some follow through tomorrow that pushes the NGN20 to 2.04-2.10 and I can sell a credit spread above 2.50 where I feel that the market won’t move in 40 days.

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Morning Update – May 18, 2020

The news of the week for me is a revision to production. HFIR shared this image on twitter over the weekend.

Daily NG production 2016 to now by HFIR

I say this is a revision, because I can’t see production physically dropping this fast in just a few days. I could be wrong, this could be a sudden change from the wells that have shut in production. Either way, it is what it is.

US Daily Industrial Demand by HFIR on April 28, 2020
US Daily Exports to Mexico byHFIR on April 28, 2020
US Daily Power burn by HFIR on April 28, 2020
Daily LNG Export pipeflow at RonHenergy.com

I’ve shared a few charts here to do a short comparison. I know this isn’t the best shared data, but I’m not allowed to share proprietary info without permission. This is the most recent of free data I found. It is enough to show a few comparisons to last year. Lets assume for a moment demand is very close to last 2019 demand numbers. Res/comm has been above 2019 due to high HDDs, Industrial dropped below, exports are near 2019 numbers, so it balances out for the most part.

I’m having a ton of trouble this morning with getting this post to work. This server seems to be having a lot of trouble. I’m going to publish this and slowly add to the post as the server allows.

US Total gas demand by BlueGold Research

So the easiest way to look at this is… to look at this last chart and the first chart. Demand, right now, is close to 2019 numbers, and production just dropped below 2019 numbers.

Seems pretty simple now, the market has swung to an under supply. This should show up soon in EIA reports soon. Also I must keep in mind storage. Even if the market is under supplied by 1Bcf/day, that’s only 365Bcf to remove from storage, so it’s going to take at least 2-3Bcf/day of an under supplied market to just correct storage by the end of the year.

Even with the revision to production numbers, this shift in the supply/demand balance must show up on EIA storage reports (which could take a couple weeks to show up). Storage is above the norm, and will keep a lid on pricing for now. With the recent revision in production, a little more hope will be given to bull mentality and prices may slowly trend up (as long as an under supplied market is still noticeable). Summer weather will have a stronger effect on pricing right now. Since the market is much more balanced, CDDs will have more influence to tip the S/D scale more toward an under of over supply.

My position

UNG – 40% in with an average of $12.36 – placing a limit to sell down to 30% at $12.36 today.

I’m optimistic UNG could get to $13 – $13.5, this week even. I’m not counting on much more than that just yet. I am a bit on the fence about whether I should sell out at $13.5 or hang on to a little now that production has dropped. I may hang on to 10% vs previous 25-30% holdings in UNG, hoping for a pop in the price. There is plenty of time to decide, and I will have more confidence in my decision as the week goes on. For now I just have a limit to sell 10% of my funds at break even of $12.36 in UNG. I’m not interested in buying unless pricing gets to new lows. Good Luck

Oldinvestor

The Heller Angle – May 15, 2020

Let me talk a little bit about how I am thinking about the NG market heading into summer and fall. Covid-19 is making me trade much smaller. It’s tough to say how much demand is growing/shrinking, and how quickly. LNG demand is down from all time highs of 9Bcf to the latest reports of around 6Bcf. We also see some weakness in industrial and residential (2-4Bcf). This demand destruction is definitely bearish and a big reason we are trading under $2 NG. Offsetting most of this demand destruction has been that supplies have fallen a similar amount. The sources I follow show a decline of 7.5Bcf in supply in the US. I believe that the LNG decline will be shorter term in nature and will come back and make new highs in the winter. Yes it might not be a fun 6 months for NG bulls, but the longer term view is bullish (10+ BCF LNG exports). The difference here is that I don’t see supply coming back quickly. I’ve read all the latest conference calls from EQT, AR, RRC, COG, SWN, CNX, MR, GPOR, and CRK. All of these producers are focused on Free Cash Flow and the group will barely grow its production. This small production growth is not enough to offset natural declines elsewhere. Most of these names have debt / balance sheet issues that they are cleaning up. We can also confirm the decline in supplies as sustainable by the Baker Hughes Rig Count and Primary Vision Frac Spread Count https://twitter.com/PrimaryVision. I also use the EIA DPR Monthly report to confirm these views https://www.eia.gov/petroleum/drilling/#tabs-summary-2. The DPR report is showing NG production declining by 0.86Bcf per month and is accelerating from lower Rigs and Frac spreads (can confirm by looking at March report and seeing a decline of 0.19Bcf per month). I am expecting to see a decline of over 1Bcf per month in the next EIA DPR report in a few days on the 18th.

NG market pretty quiet today and I am content to let my NG put spreads to slowly decay. I am still looking for 2.04-2.10 to sell a call spread. While we wait, let’s look at the call side, just in case the market ramps next week (my view) versus making the trade today. NGN20 is 1.854 with a straddle price at 1.85 of approximately 0.34 (same as Wednesday). As always, I want to be out of the noise and be 1.5 straddles away or approximately 0.51. If we were to sell the 2.35 / 2.50 call spread today, we would expect to receive 0.014-0.015. That is a solid return but let’s just watch it. I feel more comfortable selling call spreads above 2.50 and ideally above 2.75 later this summer.

Click here to view history of Josh Heller’s posts.